The definition of 100% funding is confusing to many people. If your reserve study states that you need to replace your roof in 10 years at a cost of $100,000, "fully funded" does not mean that you have $100,000 today. It means that you have $10,000 in the bank this year, $20,000 next year, $30,000 the following year, and so on until you have $100,000 on the 10th year when the roof is scheduled for replacement.

NOTE: The actual annual contribution for roofs would not be exactly $10,000 since reserve studies take into account inflation, interest earned and other factors that will change from year to year. As a result, the true contribution will fluctuate around the $10,000 figure.

Funding Levels. To determine how healthy your reserve are, divide the amount of money actually in your reserves by the amount that should be in the account. For example, if on year 5 you have $25,000 instead of the $50,000 called for by your reserve study, you are only 50% funded. If your reserves are in the 0-30% funding range, you can expect frequent and significant special assessments. Associations in the 70-100% funding range are considered financially strong, and special assessments should be rare. Below is a chart prepared by Robert Nordlund, President of Association Reserves, Inc. His company compiled data from over 7,000 recently completed reserve studies to create a profile of HOA reserve funding strength. He found that no matter how he sliced the data (large vs small, urban vs suburban, highrise vs townhome, new vs old), the results came out the same as depicted in the graph below.

Property Values. It should be no surprise that healthy reserves increase property values and improve sales. To comply with the Davis-Stirling Act, boards need to have a reserve study done every three years with annual updates in between. Associations should use experienced companies to prepare their studies, including a reserve funding plan. To improve marketability in their HOAs, boards should then make every effort to raise their reserve funding levels as quickly as possible. In addition, they should fully disclose the condition of their reserves.

Funding Plan. To encourage better funding of association reserves, the legislature requires that boards develop detailed plans on how they intend to fund their reserves. Funding plans must be adopted in open meetings and distributed to all owners. Civil Code §1365(b), Civil Code §1365.5(e)(5).